Sustainability in the Time of Uncertainty
59 Pages Posted: 11 May 2020 Last revised: 20 May 2020
Date Written: May 1, 2020
We present evidence that sustainability ratings reflect stock-inherent uncertainty. Examining the shock of the COVID-19 pandemic, we show that sustainable stocks have proven most resilient during the crash and argue that the magnitude of this effect cannot be explained by firm fundamentals. Based on an econometric decomposition of sustainability scores into three explanatory components capturing uncertainty, sentiment, and idiosyncratic sustainability, this resilience is principally driven through an uncertainty channel. Experimental evidence on investor preferences for sustainability supports the premise that sustainability is valued during the crash. The results point towards the importance of considering sustainability criteria to mitigate uncertainty.
Keywords: sustainable equity, market crash, uncertainty, ambiguity, investor sentiment, ESG factor
JEL Classification: G01, G14, G41, C33, D81, D91
Suggested Citation: Suggested Citation